Safe as Houses: IP Insurance
An essential ingredient of any mature intellectual property strategy is to ensure that you are able to enforce and defend your rights in court should the need ever arise. There is no point securing your intellectual property rights if you don’t have the means to take an infringer to court, or defend allegations being made against you.
Intellectual property litigation is highly specialised, and ending up in a legal battle over IP can be a very expensive process. Although probably out of reach for smaller businesses, many medium to large companies can benefit from obtaining intellectual property insurance. This article explains some of the basics of IP insurance.
The basics of IP insurance
The way that IP insurance works can differ significantly from insurer to insurer, and it is important that you read the terms of your policy carefully before proceeding. However, there are a number of general rules that usually apply to these products.
1. Types of coverage
IP insurance can be obtained to provide cover for:
- defending claims made against you (usually called ‘Protection’ or ‘Defence’ insurance);
- enforcing claims against infringers (this is sometimes called ‘Enforcement’, ‘Abatement’ or ‘Pursuit’ insurance); or
- both defending and enforcing claims.
The basic idea behind such insurance is that your legal costs will be paid if you need to go to court as a defendant or plaintiff (whichever is applicable). IP Protection or IP Defence Insurance may also include coverage for damages awards in the event that you are successfully sued.
2. Geographical coverage
Coverage for Australian companies will typically involve:
- Australia only;
- the World, excluding North America; or
- the entire World.
Obviously, it is also possible to obtain protection in specific countries if you only intend to trade in those countries (e.g. the UK). North America is considered to be a litigious and expensive jurisdiction, and therefore premiums for coverage in the United States and Canada are higher than in other areas around the World.
3. Level of coverage
Don’t make the mistake of thinking that the insurer is going to provide you with a blank cheque, as there are limits on what can be recovered. For example:
- insurers will not fund legal actions unless they are satisfied that you have a good enough prospect of success (particularly in relation to IP Enforcement claims);
- the amount of coverage will depend upon your specific policy, and the insurance premiums that you pay (see below for further information);
- insurers will reserve the right to withdraw funding if you do not accept reasonable settlement offers; and
- although coverage is usually provided on a ‘per incident’ basis, your insurance will usually be capped at a specified amount during each claim period.
4. Timing of claims
IP insurance usually operates on an ‘occurrence’ basis. In other words, both the infringement and the litigation must have occurred during the period of the policy. This means that you can’t claim legal expenses on claims that arose before you took out the policy, and if you discontinue the policy you can’t make a claim even if you discover an infringement that took place while you were paying the premiums.
5. What is covered
IP Enforcement Insurance will only cover specifically identified IP. Therefore you would have to involve your insurers if you want to extend your coverage to new brands.
6. Control over the litigation
One thing to look for in your policy is whether you will be able to use your own solicitors. Many insurers will insist upon engaging solicitors who specialise in intellectual property matters, and so a general commercial firm may not be suitable. However, in order to avoid uncertainty, it is usually a good idea to specify that you have the right to use a particular firm.
Costs of IP insurance
Costs of IP insurance are highly variable, as they will depend upon many factors, including:
- the individual insurer;
- the specific industry in which you operate (e.g. with medical, software and automotive industries usually being more expensive);
- the extent of the geographical coverage;
- the type of coverage (i.e. enforcement, defence or both, with policies covering defence usually being more expensive);
- the number of ‘insured products’ (e.g. the number of trade marks, patents etc that you wish to include in IP Enforcement Insurance);
- the amount of coverage which you need; and
- the level of the excess you would be prepared to pay.
As a rough guide, premiums for coverage in Australia can be 1% to 1.5% of the insured amount with an excess at a similar level. In other words, you could expect a policy covering legal expenses of up to $1 million to involve premiums of around $10,000 to $15,000 per annum with an excess of around that amount too.
In addition, as IP insurance is such a complex area, you may also need to pay a fee when first applying for your policy. Depending upon the broker and the under-writer, this fee can be $1,000 to $5,000, although some of the application fee might be rebated against your premium if you decide to put a policy in place.
2. North America
Premiums are generally higher in North America, where the costs of going to court are usually much greater than in other regions, and where litigation is also much more common. IP insurance premiums can start at the 1% region but can be over 10% for defence coverage in some industries (e.g. Auto Accessories). Further, as litigation is very expensive in North America, there is also a need to ensure that the policy insures you for greater amounts.
What should you do?
1. Do you need IP insurance?
Although IP insurance is highly specialised, many of the considerations that apply to other types of business insurance are equally applicable here. Some questions which you might need to answer for yourself are:
- How likely is it that you will need to go to court over an IP-related matter? Do you operate in a litigious industry? Do you have iconic or well known brands, patented processes or designs that others are likely to want to copy?
- Do you have the ability to pay for litigation out of your own reserves?
- If you cannot fund litigation out of your own reserves, what will the damage be if you are unable to enforce your rights against an infringer or defend your rights against a competitor?
- Can you afford to pay for the premiums out of your own cash flows? If not, are you able to obtain any government assistance that will enable you to do so (for example the Export Market Development Grant)?
- How much coverage do you require? Can you reduce your premiums by reducing the level of your coverage, or limiting the number of products that are covered in IP Enforcement claims? Is it an option for you to proceed on the understanding that your insurance will only be covering part of your likely legal expenses (referred to as ‘co-insurance’ in the United States)?
2. What level of coverage do you need?
The answer to many of the above questions will depend in part on how much you would have to pay for litigation. It is impossible to to tell clients how much litigation will cost them, especially in relation to a hypothetical claim. Litigation can cost from a few thousand dollars but the biggest fights between the biggest companies are understood to cost in the millions. Where you are likely to fall in that spectrum will depend on a number of factors, including:
- the relative strengths of the respective cases, and the parties’ own assessments of their cases (with litigation involving parties who feel they have strong cases usually being less likely to settle);
- the ability of each of the parties to fund the litigation, either from their own resources or with litigation insurance (if one party does not have the means to fight the case, then it tends to reach a conclusion more quickly);
- the complexity of the facts, and how much evidence needs to be called and tested in court (remembering that IP litigation generally involves calling quite a bit of evidence);
- how many parties are involved (e.g. distributors, importers, manufacturers etc);
- the relative fees that the particular solicitors and barristers engaged actually charge (with some being much more expensive than others);
- whether the matter goes on appeal, and if so how many appeals there are (usually one or two);
- whether you win at trial or on appeal (as the unsuccessful party will usually have to pay a portion of the successful party’s legal costs).
Statistically, the majority of matters settle before the hearing commences (i.e. with the parties agreeing to settle their differences at a commercial level). Trials costing in excess of $1 million are not the norm, but they can, and do, arise.
3. Next steps
We don’t offer IP insurance, so if you want to obtain a quotation for IP insurance, you will need to contact a broker. The process for applying for such insurance can be quite involved, and once your application is submitted, it can take three or four weeks before a policy is offered to you.